Divorce Business Valuations Are Not Always Straightforward

 

Written by: Jay Sickler, CPA, CFF, ABV, ASA

I often receive calls or emails from attorneys asking me the simple question: how much will it cost to value this business for divorce? I have learned over the years to ask a few questions before giving an off-the-cuff quote. Some questions I ask are obvious, while others are not so apparent.

For example, after clearing conflicts, I will ask:

  • What is the name of the company?

  • What does the business do?

  • How long has it been operating?

  • What were the business’ revenue and net profit the past three years?

  • What is the ownership structure? Do the parties own 100% of the business?

  • When is trial set for and are there any deadlines I should be aware of?

The less obvious questions I may ask could include:

  • Are you looking to engage a joint valuation expert with the other side, or one for your client only?

  • Are you representing the “in-spouse” or “out-spouse?”

  • What accounting software is used and how is the accounting process managed?

  • Is there a CPA involved with the company who prepares reviewed or audited financial statements?

  • Is the spouse on the other side making allegations that the financial records maintained are not accurate or there has been fraud by your client, or vice versa?

These latter questions need to be asked to help determine the scope of work and potential costs of a project.  Being hired as a joint valuation expert is something my firm takes very seriously because, to do it right, it takes a lot more time than if I was working for just one spouse.  That is because there are more detailed email communications with all parties and counsel, two “management interviews” are necessary to get both sides of the story about the business, and I make it a rule that I don’t have ex parte communications with either litigant or either attorney.

Additionally, there may be different expectations between the “out-spouse” and the “in-spouse.” The gap is often due to the difference in knowledge about the activities of the business and mistrust that the financial information provided is accurate. The spouse that will retain the business (the “in-spouse”) regularly insists that all revenue has been reported and all expenses are true business expenses. Suspicions on the other side (the “out-spouse”) revolve around revenue being underreported and personal expenses being deducted as business expenses to decrease profits, and therefore, decrease value.

As for the questions around the quality and reliability of the accounting records, I need to know whether to first get authorization to do some forensic accounting analysis. This could entail a deeper dive into the QuickBooks accounting records or this could mean that I also need to get into validating cash in and out of various bank accounts or tracking down charges to credit cards used for business and personal expenses. This forensic accounting work can add considerable time costs to a project. If I can’t rely on the financial statements provided to me, and I can’t do the work necessary to get comfortable with the financials as adjusted, I can’t prepare a credible expert business valuation. It is the old garbage in, garbage out idiom. Crummy unadjusted financial information will result in a crummy business valuation. Plain and simple.

If your client is in the midst of a divorce and needs a business valuation, Cogence Group is here to help. Our 30+ years of experience and team of experts are here to make an unpleasant situation as smooth as possible.

 
ForensicsJay Sickler